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Shearson Risks, Rewards on RJR Nabisco

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As the advisers to RJR Nabisco's board yesterday began to weigh the fairness and viability of a proposed $17 billion buyout bid for the company, other Wall Street professionals assessed what would be the largest and most complex transaction of its kind.

It is a transaction that will create huge risks for Shearson Lehman Hutton Inc., a principal sponsor of the deal.

Shearson Lehman said on Thursday that it was advising the management of RJR Nabsico, the food and tobacco giant, in considering the buyout. No formal proposal has yet been made, but one is expected within 10 days. Shearson would arrange financing and put up unusually large amounts of its own capital for the deal.

There are already indications that Shearson may have competitors. Kohlberg, Kravis, Roberts & Company, Wall Street's premier buyout specialist, is intensively studying the possibility of making an offer of its own, Wall Street professionals said. Kohlberg, Kravis is working with Drexel Burnham Lambert and Merrill Lynch & Company in studying a possible deal, the sources said.

It is uncertain that they will come up with a counterbid. Kohlberg, Kravis is also looking into the possibility of a bid for Kraft Inc., the subject of an $11.5 billion offer from the Philip Morris Companies. It would be difficult for Kohlberg, Kravis to arrange two huge deals simultaneously.

RJR Nabisco's stock fell 50 cents yesterday, to $76.75, after soaring more than $20 on Thursday when the buyout proposal was announced.

People with knowledge of the proposal said that Shearson would have to arrange a short-term loan, known as a bridge loan, of $4 billion to $5 billion. That would be by far the largest such commitment made by a Wall Street firm. Much, but by no means all, of that capital would come from Shearson itself. In addition, Shearson could use a $1.7 billion fund it has raised for investing in the equity of companines going private.

The proposal puts a tremendous amount of Shearson capital at risk. But there is ample reward for success. Shearson would be likely to earn more than $250 million in fees besides any long-term profits from owning a substantial stake in the private RJR Nabisco.

Shearson is already working with commercial banks to arrange more than $7 billion in secured lending for the buyout, Wall Street sources said. Shearson has approached Citibank and the Bankers Trust Company to try to line up the huge loan through a syndicate of banks. A Bankers Trust official said the company would not comment. A Citibank spokeswoman did not return a telephone call seeking comment.

Any buyout of RJR Nabisco, the country's 19th-largest industrial company, would require a masterful job of timing. The deal would involve an enormous mechanism with thousands of participants, all of whose roles would have to be precisely choreographed.

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For instance, so much debt would be taken on - more than $15 billion -that Shearson and the RJR Nabisco executives leading the deal would have to prearrange the sale of perhaps dozens of the company's businesses. In essence, the company would be carved up and sold even before it was taken private. Sale of Food Lines Expected

Most, if not all, of RJR Nabisco's food lines are expected to be sold, leaving the core tobacco business. R.J. Reynolds, the tobacco company, acquired Nabisco only three years ago in a highly profitable deal for investment bankers.

Prearranged sales of assets are not a new phenomenon. One of the more notable recent instances occurred in the Campeau Corporation's $6.75 billion acquisition of Federated Department Stores. Campeau found buyers and negotiated prices for a half-dozen of Federated's store groups even before it had won the competition for the company.

Such preselling is essential to gain the confidence of lenders, Wall Street professionals said. And in the RJR Nabisco deal, there would have to be hundreds of lenders.

In addition, the advisers to RJR Nabisco's board, Lazard Freres & Company and Dillon, Read & Company, are likely to look to the success of a presale of assets as a sign of whether the huge transaction is viable. Difficult Coordination Job

For its part, Shearson will have to find a syndicate of lenders to help it with the bridge loan. Such loans are also an increasingly common practice, but it has never been done on this scale. A bridge loan for the RJR Nabisco deal would also likely require more lenders than any previous transaction, adding to the difficult job of coordinating all the parties.

The bridge loan would be repaid from the proceeds of the sale of high-yield, low-grade ''junk bonds.'' The $5 billion or so in junk bonds would amount to the largest such offering ever made, another test of the financial system.

For Shearson, the rewards justify the risks, especially in light of the firm's recent poor performance. As with most Wall Street firms, Shearson's retail business has been severely depressed since last October's stock market crash.

More and more, the huge securities firm has to be supported by its investment banking activities. And, for a securities firm, there is no more lucrative investment banking deal than a leveraged buyout.

A version of this article appears in print on October 22, 1988, on Page 1001033 of the National edition with the headline: Shearson Risks, Rewards on RJR Nabisco. Order Reprints|Today's Paper|Subscribe